What Do You Care What Other People Think?

In reflecting, over this weekend, about the markets of the last week, I wonder
if we haven't seen a subtle - and subtly disturbing - shift in the markets'
behavior.

Before the Fed began the taper, and even after the Fed began the taper but
before we were really sure they intended to maintain it through at least mild
economic wiggles, bad news was treated as good news in the markets (both stocks
and bonds) because it implied more QE, or a longer QE, or a slower taper. This
was lamentable because it suggested that the Fed was more important than global
market fundamentals, but understandable at some level. All other forces summed
to just about zero, so one big institution with a very big hammer was able
to make the market vibrate the way policymakers wanted it to. So, while lamentable,
this behavior was at least understandable.

But recently, as the Fed has started ever-so-slowly receding to the back pages,
we have started to see behavior that is less unusual, but still not "normal." Over
the last couple of weeks, despite manifestly weak data - from the Employment
report to Thursday's surprisingly weak Retail Sales data and Friday's weak
Industrial Production data (which would have been even weaker if it hadn't
been for the utilities sector humming away) - the stock market has continued
a marked rally. However, this is something we've seen before: a rally not because
weak data would precipitate bullish policy, but because the weak data had a
ready excuse in poor winter weather. In this sort of environment, good news
is really good news, and bad news can be discounted (even if the cause to do
so is sketchy).

There also is some "kitchen sinking" going on even among economists. "Kitchen
sinking" refers to when a company takes advantage of a bad quarter to write
off all sorts of expenses, all attributed to the "one time event" whether
due to it in fact or not. This makes it far easier to score great earnings
in the future. It's understandable (if of questionable legality) in corporate
accounting, but when economists do it then we should look askance. Without
my naming names: on Friday one well-known macroeconomic advisor told clients
that cold weather in November, December, and January will lower Q1 GDP by 0.4%.
I am not sure how November's weather would lower GDP in Q1...in fact, it seems
to me that by lowering Q4 GDP, bad weather in December would tend to increase GDP
in Q1 because it would be building from a lower base. Whatever the reason for
the forecast, though, it certainly lowers the bar for the actual Q1 GDP report
and increases the odds of a stock market-bullish surprise (although that's
way out in April).

Much more than the former mode of taking weak data as good because it implied
more liquidity from the Fed, this sort of thing - kitchen sinking by economists,
and markets taking all news as either neutral or good - is a signature of unhealthy
bullishness. The concern is that when the reasons to ignore bad news have passed,
the market will not be priced at a level that can sustain actual bad
news. And, unlike the QE-baiting, it is something we have seen before. It is
a weaker signature, and it's entirely emotional rather than the twisted but
at least debatable reasoning that investors employed when bad news was Fed-good.

It seems almost unfair to continue to list anecdotal signs of frothy behavior,
because it's so easy to do so these days. One that sprang into view last week
was the incredibly vitriolic response to the chart
that has been making the rounds showing the parallel in equity market action
between 1928-29 and 2012-14. For example, here
was one objection, which was perhaps a reasonable objection ... but note
the tone. And this was just one example among many.

Come on, is it really so horrible, such a threat to civilization, to
have someone trot out this chart? I will take either side of the argument with
no acrimony. Personally, I don't think it's almost ever useful to think of
the past as an exact roadmap (although if I ignored this chart, and the market
did crash, I hate to think of how I would explain that insouciance to my clients
after-the-fact), but I also don't care if someone else does do so. Especially
if it leads them to the right conclusion, and I happen to think that if investors
start being cautious right now it is the right result, whether it happens because
they were scared of a spooky chart or because they understand market valuation
metrics.

But again: who cares? This is not a fact which is right or wrong - unlike,
say, the claim that the government made a change to the CPI in the early 1980s
which subtracts 5% from CPI every year. That is a verifiable statement,
and it is demonstrably false. But saying "chart A looks like chart B" can't
possibly be wrong...it's opinion! My concern isn't about the chart;
it is about the vehemence with which some people are attacking that opinion.

It is like I tell my daughter when someone calls her a dunderhead, or whatever
the 7-year-old equivalent is these days. I ask "well, are you a dunderhead?" If
the answer is yes, then you have bigger problems than what they're calling
you. If the answer is no, then as Feynman said what
do you care what other people think? Similarly, if you're bullish, what
do you care if someone runs that chart? If it's right, then you have
bigger problems than the fact they're running the chart. And if it's wrong,
then what do you care what they think?

You can follow me @inflation_guy!

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Michael Ashton is Managing Principal at Enduring
Investments LLC, a specialty consulting and investment management boutique
that offers focused inflation-market expertise. He may be contacted through
that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist,
and salesman during a 20-year Wall Street career that included tours of duty
at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation
derivatives markets and is widely viewed as a premier subject matter expert
on inflation products and inflation trading. While at Barclays, he traded
the first interbank U.S. CPI swaps. He was primarily responsible for the creation
of the CPI Futures contract that the Chicago Mercantile Exchange listed in
February 2004 and was the lead market maker for that contract. Mr. Ashton
has written extensively about the use of inflation-indexed products for hedging
real exposures, including papers and book chapters on "Inflation and Commodities," "The
Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven
Investment For Individuals." He frequently speaks in front of professional
and retail audiences, both large and small. He runs the Inflation-Indexed
Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes
for client distribution and more recently for wider public dissemination.
Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University
in 1990 and was awarded his CFA charter in 2001.